Conversation: Russia's Perfect Economic Storm

6 MINS READAug 11, 2015 | 20:52 GMT

Ben Sheen: Hello and thank you for joining us. My name is Ben Sheen, I'm a managing editor here at Stratfor, and with me today is Stratfor's senior Eurasia analyst, Lauren Goodrich, who will be talking to me about the state of the Russian economy.

So Lauren, Russia is struggling at the moment. It's back in recession, its economy is really struggling, they're having financial problems. What is the root cause of all this?

Lauren Goodrich: Well, quite a few things. I always like to say that Russia is within the perfect storm of an economic crisis. So, the Russian economy started stagnating in 2013. It was never really able to recover after the 2008-2009 recession, and in 2013 the economy really started to slow down. It's just grinding to almost a halt outside of energy. And so that was the very start of it. Then we had 2014 happen. The situation between the West and Russia over Ukraine eventually, of course, led to sanctions. And then, at the same time as sanctions against Russia, we had oil prices pretty much fall in half. And so it was multiple items put together, in which you had the Russian economy just take a nosedive over the past year and a half.

Ben: It really sounds like an economic perfect storm, and we've seen this manifested in the most recent budget by the Kremlin, where they've cut back in most areas.

Lauren: Yes, the Russian government has cut back 10 percent across the board, except for defense of course, and they've also cut many social programs. They've cut even their funding for World Cup coming up for 2018.

Ben: And that's a big, you know, that's a big publicity piece for Russia. So how else is this starting to manifest? Are we seeing these crises localized, or are they starting to spread out from Moscow itself?

Lauren: Well, it seems that the media has really been focusing on the really big picture of the recession inside of Russia. However, there is a growing, even more dangerous issue economically, in that the Russian regions are really getting further and further into crisis. The Russian regions were already in crisis even before 2014. Their debts since 2010 keep on doubling and doubling and doubling, and now we've had close to 100 to 150 percent rise in debts within the Russian regions, just over the past few years. That's astonishing when you think of Russia having 83 regions. Now, the Russian economic minister has suggested that possibly 60 of those 83 regions are in crisis mode at this time, and there's even speculation that 20 of them are already defaulting on their debt, even though the government itself doesn’t want to make it really public yet.

Ben: So this is a huge problem for Putin. Do you have any idea what Russia might actually try and do to mitigate this crisis?

Lauren: We haven't seen anything out of the Kremlin yet. It kind of seems like the Kremlin is allowing the regions to just kind of fester in their crisis mode until they can come up with a better plan. The Kremlin has the cash, it's just that it would literally drain them of the majority of what they have in reserves, if they're going to be bailing out the regions. I mean, it's 83 regions. And so it would really take a lot for the Kremlin to be able to step up and help the regions out. However, Putin of all leaders knows that keeping control within the Russian regions is top priority. And so we're seeing the Kremlin take different types of steps, such as stepping up its security apparatuses within the regions, stepping up its control within the governors and within the mayors. And so there's a much more political, security element rather than a financial or economic bailout, as far as moves coming out of the Kremlin.

Ben: Now that seems like a shrewd move, because we're seeing this growing dissent within the regions themselves, most recently over the food shortages and the issues with the countersanctions. How important is it for Putin to really keep this under control, if there's this rising tide of unrest?

Lauren: Very much so. Remember that Russia is a country that is not a united country. It is a very regionalized, localized country, in which it's almost like 83 different countries that are all put together. That's why it is a true federation. And having dissent within the regions has always been one of the root causes that collapses Russia eventually. And Putin of everyone knows this. So he's going to ensure that those specific regions that are the most resistant to rule from Moscow are going to be taken care of first. And then those regions that are a little bit more Russified are the ones that he's going to allow to fester within their economic crisis.

Ben: So it seems like something of a controversial move, at a time when Russia is already hurting, that you start to impose these controls, especially on food. What is his real motivation for that?

Lauren: Well, Putin is trying to prove a point. He's trying to prove a point to the West that he can isolate Russia from the West, from Western foods, and keep Russia Russia. The problem is that in doing this, he is actually hurting the Russian people. Putin came into power with a social contract with the Russian people, on "you will always receive your paychecks; I will keep the economy growing; I will quadruple — pretty much — standard of living; you will have Western-style foods and goods inside of Russia." And now we're seeing Putin having to step back from that social contract that has kept his popularity so high for the past 15 years, just in order to counter what is happening with the standoff with the West. So Putin is pretty much struggling between two crises: Does he want to counter the West, or does he want to ensure that his social contract with the Russian people remains intact?

Ben: So in your opinion then, Lauren, do you think this is a tipping point for the Kremlin, or is this something they continue to fight through?

Lauren: They can fight through for a few more years. The problem is that it's going to start to atrophy the popularity of Putin. In other words, the Russian people are now seeing that Putin is choosing the sanctions against the West and hurting the Russian people, instead of choosing the Russian people and just finding other means to buck against the West.

Ben: Well, Lauren, thank you so much for sharing this with us today. It's been a real insight into what's going on in Russia and in the Kremlin itself. For more analyses on Russia and the growing economic crisis, please continue to read

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